The Effective Bid‐Ask Spread and Transaction Likelihood

Abstract

This study empirically examines the relationship between the effective bid‐ask spread on foreign currency options traded on the Philadelphia Stock Exchange and the likelihood of a transaction occurring. Important contributions of this research include the use of a more precise measure of the effective bid‐ask spread than generally used in the literature and the use of data on actual transactions, plus several requests for quotes that did not culminate in a transaction. Consistent with prior theoretical work in the market micro structure literature, the results document empirical evidence that the likelihood of a transaction is inversely proportional to the effective bid‐ask spread.

Citation

Ferri, A.A. and Jain, R. (2005), "The Effective Bid‐Ask Spread and Transaction Likelihood", Managerial Finance, Vol. 31 No. 8, pp. 47-57. https://doi.org/10.1108/03074350510769802